The Constitution Did Not Decrease the Power of the States

Commentators both old and new often style the relationship between the state governments and the national government in the Constitution as a constant-sum, or zero-sum, game. What the national government got the states lost. That doesn’t quite work, however. As Publius points out in The Federalist, if implicitly, the constant-sum view doesn’t capture the complexity of the incentive structures facing states, state officials, and the Constitution’s framers.

Cathy Matson and Nicholas Onuf describe the conventional wisdom, and the rhetorical task faced by the Federalists in arguing against it.

[I]f the defects of the Confederation were easily demonstrated, it was much more difficult for reformers to redefine ‘union’ in a way that would rationalize a radical redistribution of power from the states to the central government. Reformers had to overcome formidable obstacles before they could design and then defend the extended, federal republic. The most obvious were popular loyally to the states and the pervasive fear that constitutional innovations would jeopardize republican liberty.

A few observations with public choice theory in mind can help us understand this. First, given the coordination and cooperation failures among the states under the weak national government of the Articles of Confederation, the idea that states lost power in the transition from the Articles to the Constitution is not a well-defined concept. It can be argued just as straight-forwardly, that the creation of the national government even increased the power of state governments. Secondly, Publius could suggest that the delegation of some power from the states to the proposed national government—powers in a set of identified policy areas—would actually increase republican liberty. Finally, modern public choice theory helps us distinguish just who we mean when we talk about the “states” and their interests.

The insight of the “public choice” school of political economy is that government officials are not simply neutral implementers of public policy. Rather, politicians and other government officials are just like the rest of us, pursuing individual goals that, at times, may not augur well for the most effective or efficient implementation of public policy. Now, it may say something about the field of economics that the economist who pointed this out—James Buchanan—received the Nobel Prize for re-introducing this common-sense observation to field of economics, nonetheless, we should appreciate the return of observation no matter how long it took to come about—or how much it (intentionally) undercuts the romance of politics.

In any event, both the Federalists and Anti-Federalists anticipated Buchanan. Despite Hamilton’s admonition in Federalist 1 that each side should avoid impugning the other’s motive, each side also accused the other of pursuing or opposing the Constitution out of self-interested motives. I don’t suggest that state officials labored under greater self-interest than any number of the Federalists. Nonetheless it is useful to distinguish “state interests” from the interests of “state officials” when discussing the state-level politics during the era of Constitution-making.

Here’s the relevance: Identifying a loss of power among state politicians is not the same thing as identifying a loss of power among the states. A good number of the national-level problems prompting the offer of the Constitution to replace the Articles of Confederation stemmed from deleterious competition among the states, and more generally, from the inability of states to cooperate and coordinate on policies that would benefit them all.

State policies that would have been rational for each of the states to implement individually relative to what the other states were doing nonetheless produced suboptimal outcomes for the states collectively. While cooperation and coordination failures extend beyond those captured by the so-called “prisoners’ dilemma,” nonetheless it is the best known. In this game, individually rational behavior nonetheless produces socially inefficient, or suboptimal outcomes. Put in a pithier form, individually rational behavior does not guarantee socially rational outcomes. The actors in the game unanimously desire to restrict the sets of choices they have in order that they may all be better off.

There are any number of examples in the argument of The Federalist. Perhaps the most obvious is tariff competition among the states. In an effort to induce foreign commerce into local ports, states engaged in tariff competition. As a result, competition lowered tariff revenues across all of the states relative to what those revenues would be without the competition.

The proposed Constitution did what competing firms want to do in the face of a similar situation: It merged state tariff powers into a single monopoly power called the national government. The monopolist would be able to demand higher tariffs, and so generate more tariff revenue, because of its monopoly power relative to the tariffs and tariff revenue generated by the states in competition with each other.

It may seem obvious that this results in a decrease in the power of the states, but the issue isn’t that simple.

Consider the analogy of private companies doing the same thing. Say we have thirteen widget producers in the country. They realize they can increase profits if they merge their different companies into one monopolist. (Ignore barriers to entry right now. If anything, it means that a political monopoly created by Union is more powerful than a private monopolist. A political monopolist can deter entry of competitors, at least domestically.)

So there is now one monopoly widget maker, created by the merger of all thirteen previously existing widget makers. Has the “power” of the original thirteen companies increased or decreased as a result of the merger into a single company?

On the one hand, one might argue formalistically that the power of the thirteen individual companies decreased because, now, they no longer have power to change the price of their widgets separately from the monopolist itself.

As an initial matter, however, it’s unclear the comparison can even be well-formulated given the merger of price-setting power into the single monopoly.

Given the possibility of comparison on some level, however, rather than suggesting the firms’ powers have decreased, it would seem to make more sense to suggest that because of the monopoly power they now enjoy in union with each other, their power has actually increased relative to the power they exercised as competitors.

Indeed, that the once-separate companies would now enjoy higher profits overall as a monopoly than they did as independent competitors motivated the merger—the union—in the first place.

That said, some officials of the original corporations might complain about the proposed union. Despite higher profits from the merger, some officials in the separate companies may lose some of their corporate power, or even lose their jobs entirely. But that’s not a reason for others to reconsider the merger. These officials’ complaints simply state that what is best for the companies united together is not also good for them individually. The stockholders would not be persuaded by the self-interested complaints of these corporate officials.

To be sure, in the case of the national union there was only a partial consolidation of power in a limited set of policy areas—policy areas in which individual state decision-making failed to generate the levels of cooperation and coordination needed to secure their collective interests.

Yet the merger, or consolidation, of these powers in a single national government need no more represent a “decrease” in state power than they do for the merged corporations.

Individual states acting to pursue their own interests failed to provide for the interests of those same states. Because of the incentive structures the states faced, separate state action could not provide for their common interests. So in those areas, they merged their powers into a national government. Like the private monopolist, but contrary to the common narrative about states losing power to the national government under the Constitution, it seems more accurate to think state powers increased as a result of the merger rather than decreased.